The official "blog of bonanza" for Alfidi Capital. The CEO, Anthony J. Alfidi, publishes periodic commentary on anything and everything related to finance. This blog does NOT give personal financial advice or offer any capital market services. This blog DOES tell the truth about business.

Thursday, June 30, 2011

I respect Jim Rogers for his contrarian bent and his focus on finding value in Asia and commodities. I do differ with his penchant for trying to make market timing calls. He wants to short U.S. Treasuries. Oooooookaaaaay. The difficulty in working a big short bet into an investment strategy is that no matter how sound the thesis may be, it can take forever to play out given unpredictable events.

The U.S. bond market is strong thanks to ZIRP and QE, nothing else. Those things are the result of political decisions that can be reversed in an afternoon. Taking a short position in an artificially manipulated environment is an easy way to lose one's shorts in the short term even if the reasons for the trade are proven sound in the long term.

This week's European action is telling. I had thought Greek politics were too intractable to pass austerity programs, but lo and behold they did pass some and they'll probably get their bailout after all. I would have been on the losing side if I had bet against a resolution to this crisis. Some hedge funds undoubtedly did bid up the CDS spreads on Greek debt. We'll see which ones made that call by the end of the summer if some funds have to close shop.

Shorting an entire market is hard. Shorting an individual stock, with far fewer unknowns, is a bit easier but no less nerve-wracking if you're unprepared to lose big.

Congratulations upon your selection as Managing Director of the International Monetary Fund. Please do your best to stay out of trouble. We don't want any surprises like the one we all recently got from your predecessor.

Your first order of business is to address this whole unpleasant Greek situation. Maintaining order in the international financial markets is a precondition for the United States' continued debt financing of its unsustainable lifestyle. A Greek default would set a dangerous precedent for larger, nuclear-armed nations to start living within their internally financed means. Here are some suggested talking points you should emphasize when scolding those unruly folks in Athens (written in your voice).

- No one is allowed to leave the eurozone. It is an inviolable, nonnegotiable compact of infinite duration, just like Jehovah's covenant with the Israelites but with more money.

- Banks in my home country of France hold much of your debt. I cannot allow you to rob their CEOs of their annual bonuses by threatening to default.

- German government officials have informed me that they are willing to fund your bailout if I arrange for France to give back Alsace-Lorraine. I told them they can just walk right in and make themselves at home. Done deal! Plus cha change!

- I need you to play ball because I really like my new job at the IMF. The views from my office are great and I don't want to go back to my old job at Baker & McKenzie. Those guys were always cracking jokes about my French accent and whether I was related to Pepe Le Pew and Inspector Clouseau.

- You really must stop all of these ugly protests and riots. You did not seek proper approval for this street theatre at the last Bilderberg conference and you did not recruit the agitators from our pre-approved lists of agent provocateurs / retired intelligence operatives.

- I expect your Parliament to pass its austerity measures forthwith, like sometime this week. Do not stop at the gyro stand on the way in to work. Do not pass GO. Do not collect $200.

- In the unlikely event that you are unable to pass your austerity package, I expect you to surrender unencumbered ownership of the Acropolis to the People's Bank of China. Please ensure the title deed is legible in both Greek and Chinese, and that it is delivered to the Chinese embassy in Washington, D.C. If you can't find the embassy right away, rest assured that it will relocate to 1600 Pennsylvania Ave. soon after the effects of your default are felt across the Atlantic.

- Whatever you do, don't you dare call me a cheese-eating surrender monkey. I do not eat nearly as much cheese as the typical Francophone.

Nota bene: The above "memo" is a satire of all the key players in the Greek debt drama. It has about as much chance of being taken seriously as any Fed pronouncement that economic recovery is underway in the U.S.

Monday, June 27, 2011

The big news this week is China's continuing big move into European debt, giving the EU a little bit more wiggle room as it makes contingency plans for Greece's probable departure. China doesn't take actions this big without attempting to hit several targets at once.

Target one is diversification. China has been making noise for at least a year about diversifying its foreign exchange holdings away from Treasuries. Telegraphing such an intent for so long without following through would have harmed China's credibility in capital markets.

Target two is the U.S. dollar's reserve status. Buying euros must precede buying European debt. This props the value of the euro against the U.S. dollar; indirectly, a weaker dollar makes the renminbi stronger with no need for a forced revaluation.

Target three is U.S. foreign influence. Forcing Europe to become beholden to Chinese capital will make Brussels think twice before committing to U.S. pet projects like expanding NATO, increasing European defense spending, or funding economic development projects in emerging markets that would otherwise compete with China's drive for resources.

China is playing its weakening hand well. Domestic inflation is forcing it to chase yield abroad, and euro-denominated debt is the new risky trade. Buying European debt will give it some cushion against insolvent banks and real estate projects at home, for at least as long as the European experiment in unity lasts.

Energy Transfer Equity's (ETE) bid for Southern Union (SUG) should have been a done deal when it was announced. Some acquisition targets are just too juicy to ignore. Now Williams (WMB) is jumping into the fray with an all-cash $39/share bid for SUG. Merger fights make life interesting. The benefit to SUG investors is the enhanced price discovery from competing bids. The problem is that the boards of both ETE and SUG have already approved their merger, so now a costly proxy fight among SUG shareholders is likely.

This action might make for a good merger arbitrage play as long as Williams doesn't withdraw its bid. I might have more to say in a few days once I have a chance to compare all three companies' financial statements.

Saturday, June 25, 2011

The folks at 24/7 Wall St do a great job stirring up controversy with their annual list of familiar brands that are in danger of disappearing. It takes guts to go out on a limb and claim that some venerable companies are on their way down the tubes. In the spirit of the moment, let's think about why some financial brands that should have disappeared are still around.

Merrill Lynch. These guys were spiraling down pretty hard in late 2008 until Bank of America agreed to buy them out. The deal made little sense for BofA; they already had a presence in wealth management and investment banking and would have been stronger had they just stayed away from Merrill Lynch. This is where ego trumps business sense. CEOs who want to be known for closing the biggest possible deals retain the prerogative of throwing due diligence out the window. Way to go, BofA. Grabbing Mother Merrill did nothing but make your TARP bailout needs grow.

Goldman Sachs. Do a web search on this firm and you'll see its tentacles in every business sector on the planet. The firm is insanely profitable but the way they do business raises questions about whether the firm has a conscience. "Vampire squid" pretty much nails it. Warren Buffett considers GS to be a good investment precisely because its amorality enables it to be so dominant in the financial markets. Amorality is not necessarily a recipe for immortality. Someday their enemies list will reach a critical mass and their moles at Treasury and the SEC won't be able to save them.

AIG. The continued existence of this firm is a strong argument that U.S. financial markets are rigged by the government. The firm's credit default swaps in 2008 were so radioactive that they almost single-handedly took down the economy. Hundreds of billions in TARP assistance later and taxpayers still hasn't received a decent return on their "investment."

Compiling this list is depressing. These firms will probably be around for a while. That doesn't mean I have to do business with them.

Wednesday, June 22, 2011

Well, my evening is hereby ruined. I was planning to have some fun watching videos of dancing cats or some such aimless baloney, but I had to go scanning financial headlines first. It's a habit I just can't break. Today I scanned some headlines that indicated I would be just miserable if I kept on reading. Now I can share my misery with my readers.

Let's read about desperate state pension fund managers drastically increasing their bets on hedge funds. They feel compelled to roll the dice, swing for the fences, and do whatever it takes to increase their chances of meeting impossibly high discount rates that will fund future payout liabilities. I stopped rolling my eyes long ago whenever I heard hedge fund managers spout their sales mantras of "equity returns with bond risk." That kind of nonsense unwound many a hedge fund in the liquidity crunch of 2007-2009 and only the Fed's easy money policies saved the remainder.

The easy fix is to eliminate defined benefit plans for government workers and pay out pensions that funds can support today, at sustainable levels, until they can be phased out in favor of defined contribution plans. Nothing in government is that easy. That means we'll do things the hard way with municipal bankruptcies, shutdowns of vital public services, and/or confiscatory levels of taxation.

There you have it. Now I hope you're all as miserable as I am for seeing once again just how much pain America is about to take thanks to its legions of useless professional money managers. Misery loves company. I also love keeping company with attractive women but there aren't any within arm's length right now. That makes me even more miserable.

Remember when the U.S. led the world in petroleum exploration before Saudi Arabia learned how to pump? We can have that era of dominance again with natural gas, which means we can keep the dollar as the world's reserve currency if we don't have to recycle petrodollars into U.S. Treasuries.

Find a good pipeline play that covers Eagle Ford and other gas-rich areas. Then watch the cash roll in while the gas flows out. It all sounds so easy until you try it.

The IEA can start to relax with oil futures headed down anyway thanks to decelerating GDP growth in the developed world. The free market takes care of these things without jawboning.

The world is in for a new golden age provided it avoids financial implosion in Europe, stagflation in the U.S., and North vs. South resource wars. Fun times ahead! Life just keeps getting better for everyone.

Last week I attended a thought-provoking lecture at the War Memorial Veterans Building in San Francisco. Jarom Vahai is a local military veteran who has done pioneering academic work on ancient civilizations and their technologies for terrestrial navigation. Check out his presentation yourself (here's another version); readers can comment on his work at this blog. The thumbnail summary of his argument is that ancient civilizations built giant structures to serve as navigational aids aligned with the Earth's curvature and astronomical markers. These are not just showy tombs for royals. Travelers setting off on global journeys could use pyramids and monoliths as waypoints in the same way we use global positioning system technology today.

This got me thinking about how and why the ancients would build such things. It takes a lot of capital to build something like Stonehenge or the Pyramids at Giza. Such public works projects are only available to societies that are already commercially successful. Building infrastructure that is useful in launching global expeditions implies that a powerful civilization wants to go somewhere far away, on military expeditions or trade missions. Interestingly enough, Mr. Vahai's research indicates that the alignment of an ancient civilization's pyramids correlates with whether it was primarily a commercial power or a military power. His research also implies that some pyramids may have doubled as public works projects that could pump water (pending confirmation with more research). That is potentially a breakthrough observation, and it actually makes sense that a civilization good at building things to enable global expansion would find multiple uses for these structures.

A civilization that can project power beyond its borders is a global power and a force for changing human civilization. The U.S. military uses GPS to coordinate air strikes and photo reconnaissance missions far from its shores. Knowing where you are and where you're going is indispensable for success. The ancients figured that out long before we came along. It took the rest of us thousands of years to catch up.

Europe is really pushing its luck. These moves give the trans-Atlantic ruling elite more time to sell off their remaining insider holdings under the guise of routine diversification. Just listen to those golden parachutes unfurling in the breeze with plenty of room to spare. China undoubtedly watches this action with dismay, regretting its decision to go long European sovereign debt in pursuit of a political lever. The recent cyberattacks on the IMF appear in a new light now. Was the IMF warned to prop up European debt or else face the wrath of Asian traders and cyberwarriors? Stay tuned for the next chapter in a centuries-old drama.

Thursday, June 16, 2011

One shipping company can start an industrywide trend with a push for something different, or it can doom itself with a strategic misstep. APL Logistics is pushing ahead with plans to field more 53-foot shipping containers simply because they match well with U.S. truck configurations. The problem is that U.S. trucks are the only leg of the global transportation system that is out of step with global container standards.

The intermodal industry is built around the twenty-foot equivalent unit (TEU), a decades-old measure of container traffic that relates directly to the size of a standard oceangoing container. One retailer complains that the 53-foot box makes transloading easier. They may be a lonely voice in the sector. Their distribution model is built around cheap Asian imports flowing from West Coast ports to East Coast markets. There is no guarantee that model is sustainable if rising energy costs make Asian imports more expensive.

Do longer containers pose problems for infrastructure in some places? State highway planners will have to think of new routes for extra-long trucks. Longer routes will add to shipping time and costs. LTL truckers and railroads are used to the TEU standard. Forcing them to change will force them to think about dropping some shippers as customers.

Even APL admits that only a small part of its fleet can handle 53-foot containers. Committing to newbuilds that can stack configurations other than the TEU will drive up per-ship costs as the shipbuilding industry adjusts to boutique requirements. Even analysts won't be happy with this move, because they'll have to adjust their traffic calculations to equate cargo volumes carried by two different configuration standards.

Betting against the TEU configuration is probably a bad idea. It reminds me of the U.S.'s refusal to adopt the metric system for weights and measures, which adds to the administrative costs of foreign manufacturers who want to ship goods here. Retailers who think their buying power will force carriers to adopt a new container standard assume the rest of the world will adjust. The world is pricing in the end of American dominance in more ways than we know.

Wednesday, June 15, 2011

Thank the oil speculators identified in my earlier post today for the growth in logistics costs that is outgrowing the overall economy. If the cost of moving stuff - a big expense for any company that makes things - is rising while overall revenue growth is stagnant or falling, net income compresses. Ceteris paribus applies but energy costs are an input to other expenses besides transportation. The GDP growth figure is that topline revenue number for the economy.

This is great news only for the transportation sector (one of my favorites, thank you very much). It is very bad news for the manufacturing sector. We are in the double-dip recession right now, and declining GDP growth will eventually hit the transportation sector too as customers curtail shipping for lack of sales. Poor retail sales figures in May show us what's coming.

Hedgies' attraction to commodity gambling is obvious. Greed for yield drives their pursuit of new asset classes to churn. One remaining question is whether or not the Fed's quantitative easing really is driving hedge funds to go long commodities, the results of which turn up in food price inflation around the world. We'd have to somehow link incentives for banks to keep their excess capital on deposit with the Fed to increased lending to hedgies. With those excess deposits unavailable for things like mortgage loans, are banks then forced to turn to their reliable money maker - margin to hedge funds?

This also begs a question of what regulators plan to do with their newfound knowledge of this high-stakes gambling. My bet is that they'll do nothing but talk. CFTC auditors all want to work on Wall Street too, just like their SEC cousins, so excessive zeal in cracking down on speculators won't help their careers. Nothing will change.

Tuesday, June 14, 2011

S&P just cut Greece's sovereign debt rating to triple-c, and that is not at all the kind of Triple Crown race you'd want to win. At least the Greeks beat the other PIIGS to the bottom, so they should get a prize of some sort (maybe a Grecian urn with the ashes of their country's economy stored inside).

This shouldn't be funny. There's nothing funny about the coming Greek default and the chaos it will cause when it pulls down European banks that hold Greek debt. There may be something funny about Greek chaos reducing oil prices just as certain OPEC members are preparing to raise production. Any prop traders who recently bought CDS swaps on Greek debt or went long oil futures are going to get burned badly in short order.

The first domino in the chained collapse of European equity markets and the euro itself is about to tip over.

Monday, June 13, 2011

A major computer security breach at the IMF begs the question of the instigator's identity. Why, who could have done such a thing? (I've always wanted to say that line.) Let's run through a lineup of the most likely suspects.

China. The Chinese have the most to gain from penetrating the IMF's databases. They've been shopping for European debt for some time, both to seek discounted value (Greece, et alia) and to diversify away from investments in a shaky U.S. dollar. They certainly have the computing horsepower and brainpower to pull off this kind of stunt. Motive + Means + Opportunity = fun speculation.

Russia. Other BRIC nations have money to spend and agendas to advance. Some in the post-Soviet Russian establishment have never gotten over the humiliation of losing the cold War. The IMF is a leading institution identified with the American power.

Non-state entities. Here's where wild cards can come into play. Big hedge funds have plenty of computing power at their disposal. Some hedge fund executives may just be amoral enough to authorize a little extracurricular adventure for their whiz-kid traders. A small, tight team of computer PhDs could probably whip up a spear phishing algorithm in their spare time between arbitraging yield differentials. The motivation is obvious. Getting a special look at sovereign debt valuation metrics confers the ultimate inside trading advantage. The fact that such action is illegal on so many different levels won't deter a determined hedge fund team staring redemptions in the face.

This is all guesswork on my part. I have no idea who did this and I condemn any such action. Hacker shenanigans make it harder for honest investors like yours truly to operate.

I'm glad I sold off Tidewater (TDW) once I saw its deteriorating fundamentals. Now here's another reason to shy away from inland shippers and offshore servicers for a while. Recent flooding has poured so much silt into the Mississippi River channel that business Brahmins around N'awlins are asking for $95mm worth of dredging. That kind of money is more than double the Army Corps of Engineers' entire dredging budget, but don't think of this as a potential stimulus. Emergency dredging has "broken window fallacy" effects. That money will have to be diverted from something else that's just as urgent while Congress is trying to keep federal spending from triggering defaults (on federal contracts, not debt service payments).

Things are thus worse than I thought on several fronts and I'm notorious for pessimism. It's bad news for barge operators, both captive oil company fleets and independent operators like Kirby (KEX). Barge operators can do the math on how much less cargo they can carry if drafts are maxed at 43 feet. Shippers of bulk grain and petrochemicals will have to calculate how much extra storage space they need dockside while they wait for underutilized barges to make return trips. Excess inventory has a carrying cost. Maybe this is good news for certain railroads whose trestles haven't been washed away by floods.

OPEC is going through some kind of maturation process, or perhaps a winter of discontent, or some other metaphor for a phase of life that will probably take it to a new level of (dis)organization. OPEC can't agree on whether to change production quotas. History has shown that such disagreements tempt one member country to go it alone and raise production while prices remain high, in a mad dash for a revenue spike. That won't sit well with countries whose supergiant fields are maturing (Saudi Arabia, Mexico) and not amenable to production boosts without years of new investment.

Meanwhile, there's life left in supposedly mature North American petroleum production. ExxonMobil has found plenty of oil in the Gulf of Mexico. Heads up, BOEMRE, you'll have to speed up those GOM permits if the Administration is to make good on its promise to keep the U.S. out of recession. Maybe the U.S. could join OPEC as the new swing producer if it keeps up the pace of offshore discoveries.

The death of OPEC has been predicted for decades. Those wily producers always manage to surprise the world with their longevity. The only thing that can hurt the bloc is a permanent decline in oil production. That isn't on the scene just yet.

Wednesday, June 08, 2011

It isn't enough for the U.S. government to throw money at underwater homeowners to prevent them from walking away from crushing debt burdens. Now it feels compelled to offer a subsidy to Greece to stave off a sovereign default. Can't we just let people and countries go bankrupt so they can start over? Uncle Sam sure is getting nervous about something.

It's easy to draw an inference that the European banks exposed to Greek debt are also counterparties in interest rate swaps and other deals with U.S. banks. A Greek bond restructuring will pull down banks on both sides of the Atlantic in a cataclysmic daisy chain. Alternatively, if Greece and other bankrupt countries leave the euro to hyperinflate their debts away, the euro's collapse would drive currency investors into the U.S. dollar. A resurging dollar would make U.S. exports more expensive and make a double-dip recession unavoidable for the U.S. economy.

Tuesday, June 07, 2011

Pump-and-dump schemes are even older than the financial markets in which they now operate. When Schmedlap in 2000 B.C. was touting his camels in the Egyptian desert to unsuspecting tribesman, he probably embellished their stamina just a little bit.

Monday, June 06, 2011

When I went long TDW over a year ao, I thought the stock was winner. It seemed to have everything going for it, at least according to the Buffett-derived value investing criteria I use to select equities. It had good ROE and cash flow, and management seemed to know how to add value. All of that has changed as of this June.

TDW's earnings have fallen 79% in the most recent quarter. Its EPS growth is now negative, along with its operating cash flow (with little hope of a turnaround). This is very disappointing in an environment when petroleum prices are at a premium. Long term debt has exploded from $275mm in 2010 to $700mm now. That is a huge disappointment and a major burden to carry. Imagine one of Tidewater's ships dragging several giant anchors through the Gulf of Mexico while underway. That's the kind of drag on the company this new debt represents.

Goodbye, TDW. I've sold off my entire long holding in this stock (at a decent profit, I must admit) and unwound my covered call position. I only wish I had sold off this stock when it was over $60. I had considered initiating formal research coverage of TDW until I realized that its recent financial results leave too much to be desired. I don't think I'll come back to this stock, as there are undoubtedly healthier plays in the energy and offshore services sector.

Full disclosure: No more positions in TDW; all long equities and short calls unwound today prior to publishing this post.

I was premature when I called the peak of the markets at the end of summer 2010. I didn't miss much by keeping a big chunk of my net worth in cash since then, with some exposure to China, gold, energy services, and one merger arb play. Calling a peak now is tempting but I've learned my lesson. Waiting patiently for a market decline and new bottom will prove more satisfying.

Friday, June 03, 2011

So this is what the fuss was all about. YRCW is still losing money and yet resumes contributions to the Teamsters' pension plan instead of focusing its cash on operations. Contributing $21mm per quarter is a meaningful chunk of the company's current burn rate and is precisely 21% of the new capital they are supposed to arrange from restructuring their debt. The Teamsters never took their eyes off the prize; by agreeing to a debt restructuring, they ensured they would be able to further pillage the company of cash while it continues to spiral down the tubes. Greed wins again.

If the company had chosen to file for bankruptcy months ago, it could have torn up that horrendous agreement with the Teamsters and start fresh with a new agreement giving them exactly zero pension contributions. That is now a missed opportunity and YRCW's other creditors will be poorer for it. Trucking companies with their eyes open can now see exactly what happens when union members get board seats. The unionized workforce will always put its own needs ahead of the company's, even at the risk of their employer's survival. Heads up, Arkansas Best (ABFS) . . . you could be next.

Full disclosure: No position in YRCW or ABFS. I have better places to put my capital to work than in unionized companies.

Thursday, June 02, 2011

The financial services sector needs innovation as much as any other part of the economy. That's the only way to achieve growth and deliver value over the long-term. The bad news about innovations is that many of them don't work out as intended.

If freight traffic is peaking, then similar peaks in carrier earnings and transportation sector stock prices should follow shortly. Watch out below. Those of us with large enough nets can catch falling bargains.

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Alfidi Capital is a private financial research firm.Alfidi Capital is not affiliated with any broker-dealer and does not manage money for clients.All information mentioned in this blog is derived from public sources.Alfidi Capital makes no representation as to the accuracy or completeness of this information.Alfidi Capital and its owner, Anthony J. Alfidi, may from time to time hold long or short positions (including options, warrants, rights, and other derivatives) in the securities mentioned in this blog.This blog is provided for informational, educational, and entertainment purposes only and does not constitute a recommendation or solicitation to execute a transaction in any investment product.Investors should consult with a properly licensed and registered investment professional before making any investment decision.The bottom line:Enjoy reading this blog, but the risk you take with investing is entirely your own.